Tan Kin Lian's Blog: Decreasing Term Insurance

Thursday, February 25, 2010

Decreasing Term Insurance

I have been advising consumers to buy a Decreasing Term Insurance (DTA). This will cost less than half of a Level Term Insurance.

For example, a male aged 30 can insure for $300,000 for 25 years by paying an annual premium of (say) $500. If this person buys a DTA, the annual premium can reduce by at least half, i.e. $250. (Note: the actual premium is likely to be lower, if you ask for competitive quotes from several companies).

Under a DTA, the sum insured will reduce proportionately each year. In the above example, the sum insured is $300,000 during the fitst year, and will reduce by $12,000 each year (i.e. $300,000 divided by 25). In the final year, the sum insured will only be $12,000.

It make sense to buy a DTA as the consumer is likely to have savings each year that will cover the reduction in the sum insured. For example, the savings can be $12,000 a year in the above example.

In the event of premature death, the sum insured under the DTA can be added to the accumulated savings to make a total sum that is sufficient to take care of the needs of the dependents. The policy payout can be invested with the accumulated savings in a low cost investment fund to earn a market rate of return (perhaps 5% per annum, after averaging out the good and bad years). The family can make a monthly drawdown (say $1,500 a month) from the accumulated savings to meet their needs. The total amount can last for many years, depending on the amount that has been saved.

A good combination is to have a DTA to provide a large sum to be supplemented with monthly savings that are invested in a low cost, well diversified fund.

A DTA is similar to the cover provided by a life insurance policy. Although the policy provides a level sum insured, the amount that is being insured actually reduces over the years, as the cash values are built up from the investment of the net premiums.

Many of the insurance companies in Singapore do not offer attractive rates for DTA. It may be neccessary for consumers to buy DTA outside of Singapore. You can try to get quotes from websites in America that offer this type of policy. When consumers have a choice, the life companies in Singapore will be forced to offer this type of policy on competitive rates.

Tan Kin Lian

8 comments:

John Tham said...: DTA is a good product. It is cheaper (as Mr. Tan said, half) and serve the purpose of policy holder as he does not need the same amount of premium as he accumulates his fortune or as the needs of instalments on his property is lesser over the years.; February 25, 2010 12:49 PM
Anonymous said...: Do they sell such products here?
Pray, which insurance company offer
them?; February 25, 2010 1:30 PM
Anonymous said...: If you expect insurance agents to tell you about this product you can wait long long.It may be the best product to address your needs in the most economical and efficient way but it is NOT for the agents because it earns peanuts for them.
Putting your interest first? Again dream on. These insurance agents join this business to make lots of money and you should know which products make them most commission.They pitch these products like antibiotics to treat all illnesses but unfortunately they don't cure ANY of them.
Now you understand why they dread mentioning the DTA .And they don't and never will because it foils their 'get rich quick' goal.
For them the universe of products is made of wholelife and endowment and any product that earns them high commission.
So if you engage an insurance agent to 'plan' your financial future say goodbye to your future becuase you will be saddled with burdens and shit and not wealth.
Learn from those who already learned their policies ended up in shit, still not broken even after 20 years.What kind of shit is this saving plan?; February 25, 2010 9:55 PM
Anonymous said...: It's possible you can buy the product by way of mortgage reducing insurance. When I purchased my mortgage reducing insurance from a private company (i.e. not from HDB), the agent told me I can keep this insurance even after I sell my flat. Then it functions the same as DTA.; February 26, 2010 1:09 PM
Anonymous said...: I got this aviva-saf term insurance sine my national service days. Is this sufficient? Will it be terminated when i discharge from my NS liability? I'm sure most of us here should have this, right?; February 26, 2010 5:20 PM
Anonymous said...: Insurance agents are not interested to sell you low commission products even though these products are very good for you. This is dishonesty.
I am sure you have come across agents arguing against the DTA when you wanted to buy. They would tell you lots of negative features of the product but they forgot that high coverage at low cost is what you needed as opposed to his or her need of high commission. Conflict of interest is
always in the way of insurance agents to give objective and best advice. Because of this singaporeans are under insured. Insurance agents only PUSH what benefit them but NOT PLAN in the interest of the their clients.
This is also the reason why MAS must remove commission and replace it with a fairer compensation plan. Another area MAS must make it compulsory is to make the agents plan objectively for their clients and not push junk products just for commission.
Thirdly, MAS must be the enforcer otherwise it makes a mockery of the FAA.; February 27, 2010 10:37 AM
John said...: That was amazing but you have make any kind of Level Term Life Insurance Policy
so that will help to protect your life.; April 27, 2010 12:07 AM
Kyaw Tun said...: Theoratically I agree, but as I remember, 'Decreasing Term Insurance' policies offer from Major incurance companies (Income, Aviva, Prudential) are not half cheap or almost the same as level term premium. So I bought fix termed insurance policy.; August 30, 2010 11:50 AM